Upgrade Economics - Part 1

Upgrading people for free can help airlines raise revenue – sometimes

BEEP! “Can I see your boarding pass please” … TAP TAP TAP … WHIRR … “you’ve been upgraded, here’s your new seat”.

Many travellers imagine that conversation on their way to the airport. Sadly, such breaks tend only happen to those NOT expecting it. A golden rule of travel is to pay for the cabin you expect to fly in and not be disappointed otherwise.

But for airlines, upgrades are not always a surprise – in fact, not only are many upgrades planned, putting people into plusher seats for free can be a revenue raising strategy. This article explores how, and next time we will look at how airlines can make paid upgrades successful too.

Strategy 1: Upgrading to overbook

When a passenger is upgraded there are six possibilities:

1. Economy to Premium

2. Premium to Business

3. Business to First

4. Economy to Business (double upgrade)

5. Premium to First (double upgrade)

6. Economy to First (triple upgrade)

Double and triple upgrades do happen, but are sufficiently rare to be considered random chance. For example, when an Economy passenger is last to board, their seat collapses when sitting down and the only other available one is in First, the lucky passenger might win the treble so the flight can leave on time.

Most of the time airlines will upgrade one cabin at a time and if necessary cascade up through the plane. For example, upgrading three people as Economy to Premium, Premium to Business and, if necessary, Business to First rather than one person all the way.

Upgrading people in this way makes a lot of sense for accommodating overbookings, the process of an airline selling more seats than they actually have. British Airways for example has 256 seats on their 777-300ER, 132 in World Traveller (economy) and 124 in the three higher cabins. If they are only expecting 92 higher cabin passengers, they can safely accept 164 economy bookings and cascade 32 upgrades as passengers check in.

Overbooking and upgrading in this way is extremely desirable for airlines because it enables them to monetise as many seats on the plane as possible. Without free upgrades, the airline would not be able to overbook and so would earn less revenue.

Strategy 2: Upgrading to inspire

But how should airlines decide who to upgrade? The days where people wearing ties got lucky are long gone, if they ever existed at all.

Years ago it might have been gold and silver frequent flyers given the deluxe treatment. But this is not necessarily a good idea – a passenger who is always upgraded will not buy more expensive tickets, and if they tell their friends too the demand for comfy class could be seriously damaged.

These days, leading airlines tend to see upgrades as an opportunity to show promising prospects what the enhanced experience is all about, hopefully inspiring them to pay for the higher cabin next time. Passengers who regularly fly Economy might be upgraded into Premium and regular Business flyers into First. But once a person has been upgraded once or twice, if they do not pay extra next time it is probably better to try tempting other people instead. So airlines should limit how many upgrades people can get each year.

It is probably also better for airlines to target people who paid for their tickets under a regular public fare rather than a corporate or agency deal. Such passengers are more likely to have discretion over their airline and cabin choice rather than following their employer’s policy. The final part of the upgrading to inspire strategy is to keep upgrades limited to one cabin – a cascading strategy upgrades more people so more people are exposed to a more expensive product and there is a higher chance that somebody will pay more in the future.

In these ways, free upgrades help airlines inspire people to pay higher fares than they might otherwise over the long term. Airlines can use tools like Altea’s “Discretionary Upgrade Tool” to interface departures with their customer database and to automate prospect identification and upgrade decisions in accordance with a pre-defined strategy.

Strategy 3: Upgrading to capture

As airlines use NDC, an IATA technology allowing airlines to offer a broader range of travel services, it is likely that the economics of deciding which passengers to upgrade will become even more nuanced.

Passengers demonstrating high willingness to pay for associated services like booking luxury hotels and travel experiences, or buying high-end luggage, might be given higher priority for upgrades. The idea is that if the airline believes such people are willing and able to spend cash on an enhanced travel experience, they might be the ones most likely to pay for higher cabins once they have flown them for themselves and see the value.

Of course, such logic might be flawed – if people are spending all their money on fancy rooms and bags they might have nothing left for comfy seats and the airline would be better offering free upgrades to travellers who appear reasonably frugal, but perhaps have an interesting characteristic like paying with an American Express charge card rather than a standard Visa or Mastercard. There is only one way to find out – airlines should try both and a hybrid to see which works best!

Next time we will be looking at how airlines should price upgrades. Tune in on Thursday to find out more!

oliver AT ransonpricing DOT com